The Ted Spread

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

The Fundamental Difference in Soybeans

Apr 15, 2014

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

There is a vast difference between old crop and new crop soybean fundamentals. With a record pace of exports and strong domestic usage old crop soybeans have a bullish story. However, with a projected record world carry over, projected record US acreage and a forecast for a moderate El Nino growing season the new crop soybean situation may be more bearish then what we have seen in years. So far the bullish old crop soybean situation has taken center stage but as we get closer to the USDA's first estimate of a new crop balance sheet and planting the US soybean crop will the new crop story get more attention?

The old crop soybean situation has been a bullish factor for the soybean complex as well as for the grain complex as a whole. Export sales were much stronger then expected and have set a record pace. It seems that global end users may have been double booking their needs buying both US and South American soybeans with the idea that if South America were to have issues getting their soybean crop to the ports and shipped out like they have in years past they would already have US soybeans booked and would not have to pay up on a South American delay rally, and if not the plan was to cancel US shipments and take the South American beans. However when South America was able to get soybeans moved into position for export and was able to start making shipments the US would not allow cancellations, possibly related to China rejecting US corn cargoes due to an unapproved GMO strain.

In the end the US export sales have been shipping out and the record pace of sales and shipments along with strong domestic demand has left us with a very tight soybean balance sheet and a need to price ration demand. Since February soybean prices have rallied sharply but while export sales have fallen off in recent weeks the March NOPA crush suggests that domestic demand remains strong. The NOPA crush number is a bit of a lagging indicator, but could be suggesting that more price rationing is needed to avoid running out of soybeans this year. Higher prices could also draw more South American imports, and it is possible that the higher crush number is a reflection of bigger South American imports as well.

The new crop soybean situation is almost the opposite of the old crop situation. Higher soybean prices and lower corn prices along with weak corn basis in the North due to logistical issues has encouraged a big shift to soybean acres this year. At the current USDA projection we would be looking at a record planted acreage number for soybeans. Given a normal growing season this could translate into one of the largest stocks numbers we have seen in recent years. And, although longer term weather forecasts can be a bit of a crap shoot they are currently calling for a very favorable El Nino weather pattern during the growing season. On top of that global demand seems to be slowing down at higher pries and with a huge South American crop in the process of being harvested the world stocks number is projected to be at a record high. This might mean that the world will be flush with soybeans next year. Certainly we still have a growing season to get through but, if we don't have a major weather issue we may see big soybean stocks next year.

As we get ready to plant soybeans and as we start to think about what the USDA might estimate for next years balance sheet the market's focus may begin to shift from the bullish old crop fundamentals to the more bearish new crop fundamentals. This will not happen over night, but April or May is typically when this starts to happen. Now might a good time to take a look at new crop soybean prices and lock in some prices while the focus is still solidly on the bullish old crop fundamentals.

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May Corn Daily chart:

May Soybeans Daily chart:

May Wheat Daily chart:

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.